Where the money went

How companies like JDS Uniphase lose vast sums

SAN FRANCISCO (CBS.MW) -- JDS Uniphase got crushed for making expensive acquisitions to the tune of a $50 billion annual loss, but it's by no means the first company to hemorrhage money.

Capital-intensive industrial companies such as automakers and those accounting for mergers such as JDS
JDSU
frequently bleed vast sums, analysts say. What's striking is that many report losses well in excess of their revenue.

How does a company lose more in a period than it brings in? Where does all that money go?

The type of loss reported depends on a company's business transactions, the sector in which it operates, and the accounting standards it employs.

To discern good news from bad, investors need to look hard at what's being lost. For example, while JDS lost $46.30 a share for the year, that number includes goodwill, or the difference between the price it paid for a company and the company's book value.

"It looks a lot worse than it is because it's not really cash," said Arnab Chanda, a Lehman Brothers analyst in San Francisco. He noted that the U.S. requires companies to report goodwill in the quarter it's executed as opposed to amortizing it over several years, the method used by most other countries.

JDS had write-downs in the third and fourth quarters of $44.8 billion related to the purchase of SDL, E-Tak and Optical Coating Laboratory, as well as the merger of JDS Fitel and Uniphase two years ago. Nortel Networks
NT
also wrote off $12.3 billion in goodwill in its second-quarter, leading to a $19.4 billion loss.

In the case of JDS, the bad news wasn't the size of the loss but the company's lack of confidence in future sales and "the fact that the business has deteriorated so dramatically that they couldn't give guidance about next quarter," Chanda said. "That tells you it's pretty bad."

Errors in judgment

It's not just telecom companies bleeding red ink. Pitney Bowes, the No. 1 postal equipment maker, took an almost $250 million charge in the second quarter as it restructured its mailing meter business, said Miles Hoffman, vice president of Atlanta Capital, which manages $6 billion a year.

The company took back its old equipment as part of the transition, but discovered it had miscalculated when it tried to resell the older models overseas, Hoffman said.

Pitney Bowes
PBI, +0.49%
"found it can't sell (the old equipment) for as much as it estimated when setting up the original lease."

Even so, the company raised its net income and met Wall Street expectations when it reported second-quarter earnings July 17. It said operating profits were $144.6 million, or 58 cents a diluted share, excluding certain charges and special gains, compared with $146.3 million, or 56 cents, a year ago. Shares have outperformed the S&P 500 by 28 percent this year.

Carmakers struggle

The auto industry is another heavyweight that's taking it on the chin.

Detroit's Big Three -- General Motors
GM, -1.82%
Ford
F, -1.39%
and Daimler Chrysler
DCX
-- face an uphill battle to break even on their investments, said Art Spinella, vice president of CNW Market Research in Bandon, Ore.

"You're going to see big losses for probably the next year and a half or so," Spinella said. "The break-even point has gotten to be so high that even when you have a really good year like this year is going to be, it's not good enough."

Three years ago, automakers had to sell 14.5 million cars and trucks for their production costs to pay off, Spinella said. Today, they have to move 16.6 million vehicles to reach that threshold.

Meanwhile, the cost of doing business has gone up faster than carmakers can raise their prices, he said. Prices have risen only 0.5 to 1 percent a year for the last few years, and the industry's historically raised prices 3 to 4 percent annually.

Companies also put themselves in the hole through new car introductions and yearly salary hikes written into labor contracts.

The Ford Focus, which sells for $13,000, was a multibillion-dollar undertaking, Spinella said. That's why auto companies throw their financial weight behind SUVs, such as when Chevrolet redesigned its Tahoe and Suburban models a few years ago.

"Fortunately those are expensive vehicles, so they'll be able to recoup their investments far quicker because the margins are so much bigger," he said.

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